When it comes to a Direct Selling Company’s legal relationship with its Distributors, Canadian direct sellers are treated differently from those in the US, where IRS deeming rules operate to clarify that Distributors are independent contractors and not employees!

In Canada, there is no such special status, and the “common law” determines employee vs. independent contractor (“IC”) status, making this a perennial compliance issue.

Employee vs. Independent Contractor: 4-factor test

Canadian common law has established a series of tests (or factors) for determining whether a relationship between a business and its workers is one of an employee or IC.  The leading decision is Wiebe Door Services Ltd., which established a 4-factor test:  (1) “control” (i.e. an employer will have a right to exercise day-to-day control over the employee, but not an IC);  (2) “ownership of tools” (i.e. an employee will be given its tools by the employer, whereas an IC will be responsible for purchasing its own tools); (3) “chance of profit / risk of loss” (i.e. an employee will earn a guaranteed rate of pay or salary, whereas an IC will either profit or incur losses based on how much work is done); and (4) “integration” (which looks at the extent of “integration” of the worker into the business).

In evaluating the 4-factor test, the Courts have noted that no one factor is determinative, with the ultimate question to be asked, “is the individual is carrying on business on his own account”?  (See Sagaz Industries Canada Inc.)

The Common Intention between Parties

More recently, a new inquiry has been conducted by the Courts, focussing on giving substantial weight to the common intention between parties.  For example, in Connor Homes the Tax Court engaged in a two-part inquiry, looking at (1) the subjective intent of the payor and the worker (determined by the terms of contract or actual behaviour of the parties) and (2) whether, objectively, this intent is reflected in the reality.

In the Insurance Institute of Ontario, the Tax Court also considered whether a payor and a worker shared a common intention regarding the characterization of their relationship. If they did, and they acted and carried on their relationship in a similar manner, then that intended relationship should govern, regardless of what the 4-factor test indicated!

(Whether that approach would be accepted in all cases, however, remains to be seen – i.e., just because two parties agree that the earth is flat, to avoid the “round earth” withholding taxes, does not make the earth flat!) 

Takeaways

Direct Sellers face constant challenges to their Distributor Relationships, with both federal and provisional governments often suggesting Distributors are Employees!  Examples include Employment Standards and WSIB challenges, and inquiries from CRA on payroll withholding issues.

Now is the time to review those legal relationships, and the contracts that create them!

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